European Banking Authority expressing its concerns over DLT drawbacks

4 July 2018

The European Banking Authority (EBA) published its latest report touching upon the advantages and risks coming with the application of the distributed ledger technology (DLT) in the financial services sector. The bank regulator discussed two use cases of blockchain, including cross-border trade finance and identity authentication.

Providing a detailed description of smart contracts and DLT use for the cross-border trade transactions, the EBA noted that the innovative technology has a potential to address a number of existing problems:

“A number of opportunities emerge from the use of DLT and smart contracts for trade finance. The most promising are the potential efficiency gains, cost reduction, and lower risk of duplicate financing and loss or manipulation of documents.”

Meantime, the regulator made a reservation that blockchain brings several risks because the regulating legislation remains unclear and uncertain. Given this fact, the DLT nodes located in various jurisdictions may face serious conflicts in their operation:

“For example, a digitally signed contract might not be enforceable in all the jurisdictions. It is essential to establish the applicable jurisdiction, in case of conflict, and the dispute mechanisms, when a dispute arises. ”

Further, the regulator noted in the report that the DLT may help facilitate the process of ID verification for the European banks applying customer due diligence, as the technology allows storing the information in a distributed manner. Meantime, the regulator underscored that DLT networks may fail to prevent sharing incomplete or invalid data among different nodes.